Type one beetus happens when your body does not produce insulin and therefore cannot break down sugars properly. This is called early-onset, juvenile or insulin-dependent diabetes. Since this is just a natural thing with your body that's out of whack, most people with this form catch on to it early in life, and have to treat it by making sure the sugar and insulin that they put into their bodies are in balance.

Type two beetus is more common but different from the first. This happens when your body produces insulin but it might not produce enough to function properly, or your own cells might be resistant to the insulin your body makes. Basically you're putting too much sugar into your body and your cells can't break it all down. Being unhealthy can greatly contribute to the risk of type two diabetes, and treatment and management of this kind of diabetes includes changes to your diet and exercise. It is believed that exercising and improving your health will improve your cell's reception to insulin.

There's also a third kind that happens to some pregnant women called gestational diabetes, where there's too much glucose in the blood and the cells just can't deal with it all.

Actually, for the most part, it does. Spikes in blood sugar causes large amounts of insulin. That also causes obesity and a number of other health issues. Also not good for you liver, seeing as it is what produces insulin and its counterpart, for which I have forgotten its name. Source = Multiple semesters of bio. Stupid, but apparently worth while.